Don't go it alone

Choosing the right plan for your firm the first time around keeps you from the hassles associated with closing down the existing plan and implementing a new plan. IRS Publication 560, "Retirement Plans for Small Business" provides an overview of the different plan types, but working with your accountant and/or a pension consultant can help you make better decisions for you, your firm, and your employees.

To contribute or not to contribute

Some plans require employer contributions; with others the employer's contributions to the plan are voluntary. Whether the employer is willing to contribute to the retirement plan on behalf of the employee will influence the plan choice.

The decision of whether the owners want to match part of the employee's contribution to a retirement plan will influence what type of plan is right for the firm.

Discrimination and safe harbor

A qualified plan has very specific rules on employer contributions to make sure that highly compensated employees aren't getting all the benefits associated with an employer retirement plan. Plan administration requires discrimination testing, but a Safe Harbor 401(k) plan or an Automatic Enrollment Safe Harbor 401(k) plan allows the plan administrator to avoid discrimination testing by establishing contribution and participation guidelines for all employees.

IRS guidance

The IRS Web site is a great source of information on retirement plans for small businesses. IRS Publication 3998, "Choosing a Retirement Solution for Your Small Business" lays out all the plans available to a small business and the provisions associated with those plans. Here is a summary of the different plans:

Types of plans

Simplified Employee Pension (SEP)

Savings Incentive Match Plan for Employees (SIMPLE)

Keogh plan

Payroll deduction IRA

Simplified Employee Pension (SEP)

A retirement plan similar to an individual retirement arrangement (IRA) but designed for self-employed individuals and their employees. The difference is that an individual establishes the IRA account, but a SEP is set up by the employer.

As a simplified plan, the administrative costs should be lower than for other, more complex plans. In a SEP, an employer contributes to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self-employed individuals), subject to certain limits. The following information is from IRS Publication 560:

To establish a SEP, you

Can be a business of any size, even self-employed.

Must adopt a SEP plan document.

Generally cannot have any other retirement plan.

Advantages of a SEP:

Easy to set up and operate -- usually just a phone call to a financial institution can get you started.

Administrative costs are low.

Plan can have flexible annual contribution obligations -- a good plan if cash flow is an issue.

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